Delaware High Court Weighs Broad Enforcement of Forfeiture Pacts
October 8, 2024, Bloomberg Law
Evan Parness and Christen Sewell’s commentary was included in a Bloomberg Law article covering the Delaware Supreme Court ruling concerning forfeiture-for-competition provisions in a limited partnership agreement. Evan and Christen discuss how the Federal Trade Commission’s (FTC) proposed ban on non-compete clauses in employment contracts would have provided federal guidelines for courts and companies on this issue and how states differ on the matter.
Christen notes that courts have looked at deferred compensation plans as “extras” that allow employees to make an economic choice about staying with a company or leaving for a competitor. But they “have been more suspicious where it doesn’t really look like a choice,” such as cases where the disputed payments make up too much of an employee’s pay, she said. Christen proceeds to state that the FTC also viewed forfeiture-for-competition clauses as non-competes and highlighted that all the details in such contracts matter. If an employer devised deferred compensation plans in order to enforce non-competes against its workforce, such a “shifting of how compensation is traditionally paid, if it was moved into a forfeiture-for-competition regime, I think that would be suspect,” she said.
Evan shares his insight that corporate clients must weigh whether the most employer-friendly option for employment agreements is found in the state where they’re headquartered, the state where their employees are located, or the state where they’re incorporated. For example, Evan states that Delaware and New York “really distinguish between a non-compete that in essence precludes an employee from being able to work in their particular field for a period of time versus an agreement that allows them to compete, but at a cost.” In the latter scenario, a company may be asked to offset a potential employee’s financial losses incurred by leaving a competitor. But “they’re not running the risk of getting potentially tied up in a tortious interference case” for knowingly hiring a candidate breaking a non-compete, Evan noted.
“This is why courts are willing to give a little bit more leeway to an employer trying to enforce a forfeiture-for-competition agreement versus a straight-up non-compete,” he said.
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